Investors Exit Risk; Dow Industrials Drops 189 Points

By Johanna Bennett

It was an ugly day for U.S. equities. Major stock indices held their losses, but rebounded from session lows hit after the Federal Reserve announced it could cut back further on its stimulus efforts.

The Dow Jones Industrial Average fell 189.71 points, or 1.19%, to close at 15,738.85, after falling more than 200 points immediately after the release of the Fed statement.

The S&P 500 index gave up 18.3 points, or 1%, to end at 1,774.2, and the Nasdaq Composite Index fell 46.5 points, or 1.14%, to end the day at 4,051.43.

The U.S. central bank said it would cut back on its monthly bond purchases by $10 billion, as Fed officials have said the economy looks strong enough to grow on its own.

The Fed statement didn’t mention recent turmoil in emerging markets. A string of unexpected rate hikes from central banks in Turkey, South Africa and India failed Wednesday to blunt a selloff in emerging-market currencies and fueled concerns about economic growth in these nations.

“From the viewpoint of domestic US economic conditions the Statement is completely anodyne; From the point of view of EM, the Fed has just said, ‘hasta la vista, baby,’ ” wrote Steven Englander, a currency strategist at Citigroup.

Emerging markets have been under pressure as the Fed tapers its monetary stimulus by cutting back its monthly bond-buying program, which investors say had helped push investors into those markets, which are considered riskier. With the Fed getting stinger, traders are cutting back on risk by exiting emerging-markets currencies and stocks.

“Investors were disappointed that the Fed didn’t shift their policy in deference to emerging markets turbulence.” Says Jack Ablin, chief investment strategist at BMO Private Bank. “The problem is that emerging markets aren’t part of the Fed’s mandate. Their statement didn’t mention Turkey, emerging markets or the polar vortex. Worried investors were disappointed that the Fed doesn’t have their back.”

According to the Wall Street Journal, Wednesday also saw stepped-up activity in futures and options markets, as investors looked to hedge stock holdings with bearish bets on the broad market or with bets that gold prices or stock-market volatility would rise.

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The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.